Slide 1Money Money MoneyMoneyWhat is money?Roles/Functions of MoneyRoles/Functions of MoneyTrue/False) US $ is a commodity backed money.Types of MoneyHow much money does US has?Monetary Aggregates, August 2008How much money does US has?What happens to M2?Bad Bank – Planet MoneyFractional-Reserve BankingFractional-Reserve BankingFractional-Reserve BankingMoney CreationHow Banks Create MoneyHow Banks Create MoneyMoney MultiplierThe Money Multiplier in RealityMonetary Base 1980 - 2013M2 1980 - 2013QuestionQuestionQuestionThe Federal Reserve SystemWhat the Federal Reserve Bank does?Ch 14. Money, Banking and the Federal Reserve SystemMoney Money MoneyMoneyWhat is money?Money is any asset that can easily be used to purchase goods and services.As a Legal TenderCurrency in circulationCheckable bank depositsThe money supply is the total value of financial assets in the economy that are considered money.Roles/Functions of MoneyA medium of exchangeA store of valueA unit of accountQuestion 1) Tuition in Spring 2014 is $3,000. Money is used as a _______.Question 2) Yahoo acquired Tumblr in $1.1 billion. Money is used as a ____.Roles/Functions of MoneyA medium of exchangeA store of valueA unit of accountQuestion 1) Tuition in Spring 2014 is $3,000. Money is used as a _unit of account______.Question 2) Yahoo acquired Tumblr in $1.1 billion. Money is used as a _medium of exchange___.True/False) US $ is a commodity backed money.Types of MoneyCommodity money A commodity-backed moneyFiat moneyHow much money does US has?Currency in circulation = $700 billion, Checkable deposits = $600 billion, Traveler’s check = 6 billion, Savings deposits = $4000 billion, Time deposits = $1000 billion, Money market funds = $1000 billion.Question 1) What is M1?Question 2) What is M2?Monetary Aggregates, August 2008How much money does US has?Currency in circulation = $700 billion, Checkable deposits = $600 billion, Traveler’s check = 6 billion, Savings deposits = $4000 billion, Time deposits = $1000 billion, Money market funds = $1000 billion.Question 1) What is M1?M1 = Currency in circulation+ Checkable deposits +Traveler’s check =$700 billion+ $600 billion+6 billion = 1306 billionQuestion 2) What is M2?M2 = M1 + Savings deposits+ Time deposits+ Money market funds = $4000 billion+$1000 billion+ $1000 billion = 6,000 billionWhat happens to M2?Dr. Grace was cleaning her library, and found $100 from her old textbook. She deposited $100 into her saving account. What happens to M2 due to her $100 deposit?Bad Bank – Planet Moneyhttp://www.thisamericanlife.org/Radio_Episode.aspx?sched=1285Feb 27. 2009 #375: Bad Banks (3:30 – 8:30)Fractional-Reserve BankingThis T-Account shows a bank that…accepts deposits,and lends out the rest. Bank’s capital (banker’s Money)Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Fractional-Reserve BankingQuestion) What is Reserve Ratio of this bank?Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Fractional-Reserve BankingQuestion) What is Reserve Ratio of this bank?Reserve Ratio=Reserve/Deposit= $9/$90 = 0.1OR 10%Assets LiabilitiesAdam’s BankLoans (MortgageLoan)$91.00Deposits$90.00Total Assets$100.00Total Liabilities$100.00Capital$10.00Reserves $9Money CreationQuestion) Dr. Grace found $1,000 cash hidden in her old textbook. She deposited $1,000 into her checking account. How much money supply changed? (Reserve Ratio = 10%)How Banks Create MoneyAssets LiabilitiesFirst BankReserves$100.00Loans$900.00Deposits$1000.00Total Assets$1000.00Total Liabilities$1000.00Assets LiabilitiesSecond BankReserves$90.00Loans$810.00Deposits$900.00Total Assets$900.00Total Liabilities$900.00Money Supply = $1000 + $900 = $1900.00!How Banks Create MoneyMoney MultiplierChanges in Money supply (ΔM)= $1,000 + 900 + 810 + 729 …= $1,000 x (1/0.1)= $10,000ΔM = (1/Reserve Ratio) × ΔMonetary Base Money Multiplier = 1/Reserve RatioMoney Multiplier = 1/Reserve RatioThe Money Multiplier in RealityThe monetary base is the sum of currency in circulation and bank reserves.The money multiplier is the ratio of the money supply to the monetary base.Monetary Base 1980 - 2013M2 1980 - 2013Question1. Reserve Ratio = 5%, What is money multiplier?2. Monetary base went up by $1000. How much is money supply change?Question1. Reserve Ratio = 5%, What is money multiplier?Money multiplier = 1/0.05 = 202. Monetary base went up by $1,000. How much is money supply change?ΔM = 20 x $1,000 = $20,000QuestionWhat is the name of central bank of U.S. economy?The Federal Reserve SystemWhat the Federal Reserve Bank does?Supervise and regulate financial marketMonetary PolicyOpen Market Operation (Q.E.)Reserve requirementDiscount
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